Expensive valuations of IndiaMART IPO may disappoint investors

While long-term opportunity appears robust, high valuations mean little near term gains: Analysts

Investors looking for short- to medium-term returns may be in for a disappointment if recommendations of broking houses on the initial public offering (IPO) of IndiaMART InterMESH (IndiaMART) are anything to go by.

Valuations for the Rs 472-crore IPO that opened on Monday are at 140x its trailing 12-month net profit.

Incorporated on September 13, 1999, IndiaMART is an online business-to-business (B2B) service provider, with paid supplier base of little less than 130,000 and 82.7 million registered buyers as of March 2019. The company enables discovery of products and suppliers across 50 industries. According to a KPMG report, it has around 60 per cent market share of the online B2B classifieds space in India in 2016-17.

Among the investment concerns for analysts are demand slowdown for listed products on IndiaMART, high employee cost, its inability to monetise full benefits as it turned profitable only in 2017-18, and dependence on subscription growth that may get impacted negatively with rising competitive intensity.

However, it’s the valuations, says Jaikishan J Parmar, analyst at Angel Broking, “at the upper end of the price band, IndiaMART demands price-to-earnings multiple of 33x of 2018-19 (FY19) earnings (adjusted for fair value of assets and liabilities). Considering the investment concerns, we believe investors should wait for price discovery before taking any investment decision.”

Other analysts say that the valuation of 140x FY19 earnings (upper price band) looks aggressive, given the intense competition from emerging players and new entrants. Players such as Google, NinjaCart, Power2SME, and Udan are likely to pose strong competition to IndiaMART.

Though direct peer comparison is not possible in this case due to unavailability of listed players, companies such as Justdial can be considered proxy peers, which also have lower valuation.

However, many analysts are positive on long-term growth prospects of the company. Geojit Financial Services, which has ‘neutral’ rating on the IPO says, “the company (IndiaMART) should be considered in the long term, given the sustainability of its profitability due to strong market share, healthy balance sheet, rich in cash, nil debt, and healthy return on assets.”

IndiaMART is expected to be well positioned to leverage opportunities from B2B space in India, amid rising preference for e-commerce channels. With growing e-commerce market, many sellers are coming online to offer their products and services to a wide range of customers. This online addressability has led to businesses becoming increasingly discoverable online, which is leading to the B2B e-commerce market gaining traction as well. Besides, IndiaMART’s brand recognition further adds to its long-term growth potentials. 

On Monday, the IPO was subscribed 51 per cent with retail and institutional categories getting 49 per cent and 76 per cent subscription, respectively.